Info + Advice for Indies

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Estimated Tax Payments

Shouldn't scare the bejesus out of you.

Federal income tax, Social Security tax and Medicare tax are pay-as-you-go taxes; that is, the tax must be paid as income is earned.

Dennis Dubya-two, shipping clerk for Toys ‘n’ Things, receives a paycheck every week. Each week Toys ‘n’ Things withholds all applicable taxes from Dennis’s pay and forwards them to various government agencies. At the end of the year Dennis receives a W-2 which shows income earned and taxes paid.

The self-employed must follow the same pay-as-you-go method as do wage earners like Dennis. As an entrepreneur brings in income he withholds taxes from himself — that is, he puts money aside — and then sends his taxes to the government via estimated tax payments.

Not every self-employed has to make estimated tax payments. It’s the overall tax liability of a self-employed that determines whether estimated tax payments are required. An indie’s total tax liability is made up of self-employment (SE) tax on his net self-employed earnings and income tax on all his and his spouse’s income. (Read Taxes: Which ones and how much do I pay for a more complete explanation of those two taxes.)

Income tax on self-employed income and SE tax are not the only factors in calculating estimated tax payments.

If, for instance, you had self-employed business income of $10,000 and also had investment dividend income of $30,000, both these sources of income (totaling $40,000) would be elements in your estimated tax calculation. And if your wife earned $90,000 at her W-2 job, the taxes withheld from her income would also be a factor in those calculations.

Because someone is self-employed doesn’t necessarily mean that he must make estimated tax payments.

Consider the following situations:

The previous year’s tax refund may be sufficient enough that when carried forward as a payment toward this year it eliminates the need for estimated payments.

Enough tax may be withheld via a W-2 job or pension withdrawals to cover the entire tax liability.

When all income is combined with deductions income is so low that there is no tax liability.

Who Must Make Estimated Tax Payments?Although there are exceptions, here’s the safe and simple rule:
You must make estimated tax payments to the federal government if you had a tax liability for the previous year and you expect to owe tax of $1,000 or more when you file your tax return for this year.

When And How To Make Estimated Payments
Under most circumstances you will make four estimated tax payments to the IRS and also possibly to your resident state. If you earn self-employed income in a state where you do not live you may have to make estimated tax payments to that non-resident state as well.

The methods used to calculate the IRS estimated payment amount usually apply in the same way to the states – but to be sure you ought to confirm this with your tax preparer or state tax office.

The following chart shows the dates for making estimated payments.

When To Pay

Estimated Tax Payment Due Dates

For the period:

Due date:

January 1 through March 31

April 15

April 1 through May 31

June 15

June 1 through August 31

September 15

Sept. 1 through Dec. 31

January 15, the following year

It is not a crisis if you’re late on a payment due date. Depending on the amount of tax payment, an interest and/or penalty amount will be calculated at the time your tax return is prepared. The IRS rate is lower than most credit card finance charge rates.

HOW TO PAY
There are several ways to pay estimated taxes.

– Carry forward a previous year overpayment.When you file your tax return, if you have an overpayment of tax you can choose to have the refund returned to you or you can apply part or all of it to your estimated tax for the following year.

The amount you have carried forward as payment toward the following year should be taken into account when figuring your estimated payments. You can use all the carry-forward amount toward your first payment, or you can spread it out in any way you choose among any or all of your payments. If you find the January 15th payment difficult because of holiday spending then use your carry-forward to ease your cash flow and have it applied to the fourth payment.

– Pay by check.Use Form 1040-ES, Payment Voucher, to pay federal estimated tax. There are four numbered vouchers. Include one with each payment by check. If you made estimated tax payments in the previous year, you’ll receive IRS payment vouchers in the mail for the current year. Or you can download the vouchers here Estimated Tax Vouchers + Instruction .

Be sure the voucher is filled in accurately. If you are married then write the names and Social Security numbers in the same order as they appear on your tax return.

Make the check or money order payable to the “United States Treasury.” On the check or money order write your Social Security number and “2010 Form 1040-ES.” Don’t staple or clip the check to the voucher.

Careful! Never send a payment to the IRS (or any government agency) without the correct document accompanying the payment. And be sure that document, for instance, a payment voucher, is correctly filled out.

– Pay by credit card, electronic payment or withdrawal.Be careful if you pay your estimates, or any other tax, by credit card. Most service providers charge a fee. This is in addition to any finance charges that will accrue, usually daily, on the amount you owe the credit card company.

6 Responses to “Estimated Tax Payments”

Hi June! I’m a Graphic Designer in Worth IL whom, just started a business late last year. Right now I’m working full time at my main job and this is my side business.

I’ve done self filing the last couple of years using turbo tax and I was planning on sticking with it this year as well. My question is, can file both my business earnings/expenses and my W2 from my full time job on the same tax form?

Yes, as part of your personal tax return, Form 1040, you also file as self-employed using Schedule C, Profit or Loss From Business, as well as several other forms.

Here’s the problem: Your basic question indicates you know little if anything about filing as a self-employed. And the self-employed part of the return is complex. My concern is that should you prepare your return instead of hiring a tax pro, you may very likely cheat yourself. And I have strong reservations about Turbo Tax for indies.

[…] $8.33 interest. Which is calculated later, when you file your 2010 tax return.Read my article on when and how to make estimated tax payments.– JuneTo learn more, please be sure to check out the Learning Tools […]

[…] from taxes because this is your first year of freelancing. Now who could have told you that?! Read Estimated Taxes to get an overview of how estimated taxes work. Then read blog posts on estimated taxes if you need […]

Estimated payments are a pain and if you fall short on April 15 you have to pay a fine. My accountant just pays the $150.00 fine for not making estimated payments and I do the same. I file once a year and just pay the fine since I never guess the right amount anyway due to the nature of my business. Whats your take on this? Love this site and have used your info for years!

The fine is not $150. The fine is based on how much you owe and for how long you owed it. If your tax underpayment come April is $1500 the penalty and interest you owe will be very different than if you owed $15,000 come April.

And why are you OK with giving the government $150 anyway???

Read this about estimated tax payments. Shows you a much smarter, savvier way to do things — Estimated Tax Payments:Shouldn’t scare the bejesus out of you.

I really enjoyed reading your book. So many other [tax books] were too technical, very lengthy and downright boring. You injected your sense of humor and put everything in layman’s terms. I refer to y…Ephraim Schum

I recently bought your book, and wanted to tell you what you already know – it’s terrific. So many great common-sense features. In addition to my “indie” business, I’ve also been a tax preparer for an…James M. Beidler

I purchased a couple of books re: self employment taxes. I like yours (Self-employed Tax Solutions) because it’s written in plain language. The JK Lasser book (Small Business Taxes) appears to be writ…Linda Gordon

I just purchased your book Self Employed Tax Solutions, and let me start by saying this is the first time I have written an email to an author. I’m only in the third chapter and am so happy about the …Dean Iodice

I read Self-employed Tax Solutions from cover to cover in about 3 days (I finished it today), and found it engaging and well written. That’s high praise for a book on taxes. I’ve read other tax books ……Paul Plamondon